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WGA: Strike Would Adversely Affect AT&T Time Warner Merger

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I am writing to inform you of a potential labor dispute at Time Warner, the corporation AT&T is in the process of acquiring. The Writers Guild of America collective bargaining agreement that covers all writing for film, television and digital media in the United States expires at midnight on May 1, 2017. To date, negotiators from the WGA and the Alliance of Motion Picture and Television Producers, the organization that represents the entertainment industry’s employers, have been unable to reach agreement on a new contract. The WGA has announced that the membership will vote to authorize a strike.

WGA members are the driving force behind film and television; they are responsible for creating, writing and producing more than 4,000 episodes of scripted programming each year for network television, basic cable and pay TV networks, and online services like Netflix, Amazon and Hulu.

In the event we are unable to negotiate a new contract with the AMPTP, a work stoppage will begin May 2nd. Should this occur, writing for television, feature films and digital series will cease. This will include all writing on live-action feature films and television series made by Time Warner production entities. Time Warner employs approximately 1,000 Guild writers annually. In television, WGA members write and produce 725 episodes of television for more than 50 Time Warner-owned scripted series each year. WGA members are the creators of Time Warner’s top television brands including The Big Bang Theory, Game of Thrones and Westworld.

Late night shows made for Time Warner networks including Conan, Full Frontal with Samantha Bee, Real Time with Bill Maher and Last Week Tonight will go off the air immediately. Critically, a work stoppage in May could significantly affect the fall television season. Writers on fall broadcast series typically begin work in May and June in preparation for fall season launches. This lead time is needed to develop storylines and write episodes prior to the start of production. Any delay in the start of work has the potential to postpone fall season premieres and reduce the amount of programming produced for the 2017-2018 broadcast season, which includes more than 20 scripted series produced by Time Warner. As the number one supplier of television shows to the broadcasts networks, a strike would disproportionately impact Time Warner.

A writers’ strike could undermine AT&T’s primary reason for acquiring Time Warner, which is ownership of compelling content. A strike could also delay any potential shareholder benefits from the acquisition. AT&T has promised that the merger will generate returns for shareholders within a year, stating, “The transaction will be accretive to its adjusted earnings per share and accretive to its free cash flow within 12 months after the completion of the transaction.” Further, as AT&T continues to increase its indebtedness, a strike that reduces Time Warner revenue and profits could affect cash flow and the ability to pay dividends.

The last writers’ strike began in November 2007 and lasted for 100 days. It resulted in the loss of almost 25% of primetime scripted programming for the 2007-2008 broadcast season. During the strike, the broadcast networks ran out of new episodes to air and were forced to air reruns and increased amounts of reality programming. The loss of original programming had a significant impact on ratings. During the three months most affected by the strike, the major broadcast networks’ ratings declined, on average, double digits compared to the same period in 2007. The strike-impacted ratings forced NBC to return money to advertisers. Should a strike occur in 2017, we would expect that the delay or loss of original primetime programming will similarly affect ratings and encourage a shift in viewership to online platforms that compete with core Time Warner assets. With the television advertising buying process known as the Upfronts scheduled for May, a work stoppage could delay sales or place pressure on advertising rates and price increases if the broadcast networks, which includes Time Warner’s CW network, are unable to guarantee original programming for next season.

Television series production has become far less risky than ten years ago, and a loss of episodes of the magnitude of 2007 would have a significantly greater financial impact. Further, in the last ten years, Time Warner has become increasingly dependent on television revenue because the company has sold or spun-off its cable distribution, publishing segment and AOL.

With the growth of the international television market and demand from subscription video on demand (SVOD) services, like Netflix and Amazon, both in the U.S. and abroad, series television has become a more profitable business. In 2007, most scripted television series were deficit financed, requiring the production of at least four seasons before becoming profitable through a syndication sale. Now, U.S. television series are licensed in-season to networks around the world, generating billions in revenue. Once the season ends, series are often licensed to Netflix or Amazon for fees ranging from the hundreds of thousands to millions per episode.

As early as 2012, Time Warner reported to investors that the combination of domestic and international license fees exceeded production costs by 23 percent. The image below is from a presentation given by Bruce Rosenblum, then president of Warner Bros. Television Group, at the 2012 Barclays Capital Group Technology, Media and Telecommunications Conference.

While Time Warner has enjoyed the success of the television business, writers’ income has declined sharply in the last five years. The average pay of writer-producers working in television declined 23% over the last two years alone. The decline is driven by the growth of short order series with 13 or fewer episodes. Writers, who are primarily paid by the number of episodes produced, often work just as many weeks on a short order series as they did on a traditional 22-episode series, but are paid for fewer episodes. Writer-producers are the only employees on a television production who do not receive additional pay for additional time worked.

It is simply a bad business practice to have writers, who are the acknowledged creative heart and who are ultimately responsible for the most important assets in the business, be left behind as the business succeeds beyond all expectations. This is a recipe for catastrophe.

In addition, script payments and residual compensation in areas of original programming growth such as basic cable and SVOD remain lower than the standards set in broadcast television. Adopted at the inception of these markets, these lower rates have failed to keep pace with the meteoric rise of basic cable profitability and Netflix’s growth around the globe.

The WGA’s contract demands seek to address these problems by increasing weekly compensation, fees for scripts and residual compensation for WGA members. The cost of WGA’s proposals to Time Warner are affordable. We estimate the improvements would cost Time Warner $27.4 million. This represents roughly four-tenths of one percent of Warner Bros.’ annual film and television production costs.

Time Warner management’s refusal to make a fair deal risks impairing shareholder value and lowering earnings per share. As you may be aware, the merger agreement between Time Warner and AT&T gives both companies certain rights to terminate the merger. AT&T has the contractual right to terminate the merger agreement if Time Warner “breaches any of its representations, warranties, covenants or agreements in the merger agreement, or any of its representations or warranties shall have become untrue after the date of the merger agreement…”

As part of the merger agreement, Time Warner has agreed that it will “use reasonable best efforts to preserve its business organization intact and maintain existing relations and goodwill with governmental entities, customers, suppliers, distributors, licensors, creditors, lessors, employees and business associated and others having material business dealings with Time Warner (including material content providers, studios, authors, producers, directors, actors, performers, guilds, announcers and advertisers) and keep available the services of the present employees and agents of Time Warner and its subsidiaries.”

In addition, Time Warner has also made the following representation regarding labor matters. “(i) Labor Matters. (i) As of the date of this Agreement, except as would not result in any material liability to the Company and its Subsidiaries, taken as a whole, (A) neither the Company nor any of its Subsidiaries is a party to or otherwise bound by work rules or a collective bargaining agreement or other similar Contract with a labor union or labor organization (collectively, “CBAs”), (B) nor is the Company or any of its Subsidiaries the subject of any proceeding asserting that the Company or any of its Subsidiaries has committed an unfair labor practice or is seeking to compel the Company to bargain with any labor union or labor organization, (C) nor is there pending or, to the Knowledge of the Company, threatened, nor has there been since January 1, 2012 and prior to the date of this Agreement, any labor strike, walkout, work stoppage, slow-down or lockout affecting Company Employees. On and after the date of this Agreement, there has been no labor strike, walkout, work stoppage, slow-down or lockout affecting Company Employees, except as would not reasonably be likely to have, individually or in the aggregate, a Company Material Adverse Effect. Except as would not result in any material liability to the Company and its Subsidiaries, taken as a whole, as of the date of this Agreement, none of the employees of the Company or any of its Subsidiaries is represented by a labor union, and, to the Knowledge of the Company, there are no organizational efforts with respect to the formation of a collective bargaining unit being made or threatened involving employees of the Company or any of its Subsidiaries.”

Should a WGA strike occur, Time Warner would have to modify the foregoing representations. A strike of the writers who create the programming that fuels both Time Warner’s film, studio and network segments has the potential to materially affect Time Warner’s revenue.

We ask you to contact AT&T and Time Warner management to urge the company to negotiate a fair deal that avoids a strike. If you need any more information, please contact the WGAW’s Research Director, Ellen Stutzman.

Sincerely,

David J. Young

Executive Director

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